For most dairy producers, land is their main source of equity and, with commodity prices in the doldrums, many are putting their hopes in land markets being able to withstand the crisis caused by COVID-19. Slumping land values would severely deepen this current crisis.
On the positive side, despite the depressed farm economy over the last few years, land values have held up relatively well in 2019 across the Central US. According to the data from the Federal Reserve, most regions reported small declines in values of just 1% to 2% during 2019. In Wisconsin, the data from the State Department of Revenue is pointing at a similar drop in land values of about 2.5% for 2019.
Farmers represent the majority of farmland owners and buyers, therefore, farm income and access to capital has a large influence on land values. All indicators point to a sharp drop in farm income in the coming months. And producers’ access to credit will also be limited despite the Federal Reserve’s lower interest rates. In fact, if lenders perceive higher risk on farm loans, the effective interest rates to farmers might remain unchanged. So the demand for land will soften, maybe severely.
Staving off a downturn
But there are two factors that can help stave off a major downturn in land values.
1. The secret to successful real estate investment is the ability to hold on to the asset for long periods. As long as most landowners in your area will be able to hold on to their parcels until the markets bounce back, supply of land on the market will remain low and that can go a long way in supporting land prices. Try to manage your finances so you can also hold on to your land to limit your losses or even improve your gain on land values as well.
2. With the growing volatility of stock markets, a number of investors might look for steadier investments, like farmland. Over the years their presence in farmland markets has been controversial. But, in regions where they are most active, investors’ presence should help us avoid severe decline in land values.